Implications Of A Decline In Labor's Share Of Income

Most of our attention has been focused on our short term business cycle.  The recovery has been slower than our typical recovery from recessions and economists differ on how to explain the slow recovery and what should be done about it.  This article raises a concern about longer term policy issues. In particular, it focuses on how we fund Social Security.  It is funded by taxes on earned income under a ceiling, which today is $110,000, but which increases with the rate of inflation. Our long term projections of government's ability to fund Social Security is based upon assumptions about the growth of the economy, and the distribution of income.  If the share of income going to capital increases faster than labor income, Social Security funding will decline because most of the growth in income will be above the income ceiling.  That explains why many want to cut Social Security benefits. The choice is between a cut in benefits, or changing the method of funding.  Those with incomes above the ceiling, prefer benefit cuts to raising the income ceiling.

It is likely that the growth in income inequality will follow the current trend.  Capital's share of national income will grow as capital replaces labor, and labor income falls relative to capital income.  The nation will be richer, and able to afford Social Security benefits at the projected benefit levels, but not with the current method of funding which depends upon more equal growth in capital and labor income.